Position Size to Determine How Many Shares to Buy

Let’s say (hypothetical): The market is trending higher. You find a stock to buy. You setup the proper risk-to-reward scenario.

So, how do you determine how many shares to buy?

Let’s setup a few hypothetical scenarios with three investors trading different size accounts.

Trader A has an account with $100,000

Trader B has an account with $50,000

Trader C has an account with $10,000

This exercise will teach novice investors how to properly position size their trades, preventing you from blowing-up your account or risking too much on one position.

These examples will buy the same stock (XYZ in this case) but we will do so with different stops based on different trade setups: 5%, 10% and 15% sell stop. The positions will also be placed in three different accounts. My free excel position sizing spreadsheet is the only tool I am using to determine the size of each position based on the entry price, sell stop (risk) and size of the account.

The number of shares change but the risk stays the same! Let me say that again, the number of shares change but the risk stays the same for all three traders.

Please note that these examples don’t consider other variables such as commissions, slippage, etc. Please read the book by Van K. Tharp to study the detailed models of position sizing. I will also like to note that it is very difficult to employ position sizing strategies with accounts smaller than $10,000 (even this is a small amount and can blow-out if not traded carefully).

Please understand that the number of shares changed in each scenario based on the size of the portfolio as the risk remained constant at 2%. Now watch what happens when the risk is cut in half to 1% of the total account. We will use “Trader A” with the $100,000 account using 1% risk, a 7% sell stop and a buy of XYZ at $60 per share.

Comments

Hi, thanks for the examples, I am in the middle of this book and it’s a great read. My account started at only $5000 (that’s what I had), but I still emply this with options trading which usually lets me purchase one contract of between $100-$200. My recent post on VIP goes through that process for a current position.

Hello, Chris. Thanks for the article. Something similar is also available in your portfolio spreadsheet, which is also very cool. I was only wondering why is the Exit Share Price included? Oh, and I also wanted to ask you, if you delete your positions from the Portfolio Spreadsheet after you sell them or do you leave them in? Thanks.

When I sell maybe I’m wrong? If stock costs £3 buy £9000 = 3000 shares. Say up to £4 sell about 700 taking the profit. left with 2300 shares. Profit taken = £2800. That’s if stay the same. If they go up sell difference on price. Moves to 4.5 sell .5. You keep shares in case of large rise or if they drop you still have taken cash out. Clear? as mud. neil UK

Tharp has come out with a new book called Definitive Guide to Position Sizing. He uses a trade simulator to optimize position size based on the desired objective (e.g. 100% profit) and the trader’s personal definition of ruin (e.g. 33% loss of initial equity).

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Trend Trading

I am a trend trader looking for gains of 25% or more and losses no larger than 10% (preferably smaller when I am smart enough to cut the immediate loss) on trades that will last anywhere from a few weeks to several months or longer. I aim to be prepared to trade in situations when the odds are in my favor by properly employing risk management strategies such as position sizing and expectancy.